The Gilmo Report

January 15, 2020

January 15, 2020

As the indexes and leading stocks get further extended, the likelihood of a pullback intuitively increases. Given how far things have come since the early-October lows, a reasonable excuse can easily trigger some selling as we saw yesterday. Then, it was reported that the U.S. would not be rolling back previously imposed tariffs on China now that the Phase One deal was in the books.

A rally this morning, likely due to the signing of the Phase One agreement, ran out of gas, resulting in an above-average volume churning day for the NASDAQ Composite Index. Meanwhile, the S&P 500 and the Dow both made new closing highs but also churned around a bit. Today’s action on the NASDAQ follows a high-volume churning day yesterday.

 

 

I wrote over the weekend that I didn’t see much in the way of long set-ups that I’m willing to pound the table on. That remains the case for now. I need to see some pullbacks where I can buy on weakness, assuming that’s what I want to do, at this stage of the game when things are so extended. And with all the good news out, we may be on the verge of some kind of pullback. So I’m willing to lay back and focus instead on whatever opportunities show up as we progress through earnings season, whether that’s long or short.

My discussions and strategies for individual stocks that are about to report earnings are for now relegated to my video reports, where I can more easily present a more thorough discussion of the topic. Over the weekend I discussed the fact that several big-stock financials were set to report earnings this week and that in most cases, given how extended financials have become, I was looking to short post-earnings rallies.

J.P. Morgan (JPM) is one example, and I followed up on how one would have handled this on the five-minute 620-chart yesterday as it stalled near the prior January highs and reversed to close in the lower half of its price range. The stock then broke below its 10-dma and 20-dema on heavy selling volume. While the best short entry was yesterday on the post-earnings gap-up and move higher, JPM is now in a potentially failure type of position as it breaches the 20-dema.

Thus, it can be tested on the short side here using the 20-dema as a tight covering guide. But mostly, JPM serves as a good example of a shorting opportunity that emerged after earnings, and this is what I’m talking about when I say that I’m mostly focused on these types of moves as we progress through earnings season.

 

 

The pullback in precious metals has occurred in orderly fashion, with the iShares Silver Trust (SLV) coming right back into its 20-dema. Theoretically this would bring it back into a lower-risk entry position. However, we must also assess silver within the context of what is going on with gold, since the two metals tend to correlate. Therefore, technical signals and set-ups in one can apply to the other.

 

 

So, while the SLV has held support at its 20-dema, the SPDR Gold Shares (GLD) is extended from its own 20-dema as it consolidates along its 10-dma. The 20-dema looks further below, and a pullback to the 20-dema could occur. Note that this would also constitute a filling of the prior January 3rd gap-up.

If silver fails to hold its 20-dema, then likely gold’s support at the 20-dema will come into play for the duo. Both have become quite extended from their early-December lows, and some consolidation is to be expected. It is therefore just a matter of understanding how this might play out.

 

 

If one is interested in owning gold-related stocks, then maintaining an opportunistic approach is also strongly advised. A good example is the action in Agnico-Eagle Mines (AEM). Yesterday the stock undercut the 57.77 December 20th low and rallied, triggering an undercut & rally (U&R) long entry at that point.

AEM then continued higher from there, clearing the 50-dma in what can be treated as a moving-average undercut & rally (MAU&R) long signal at the 50-dma. You then use the 50-dma as your selling guide, but the best, initial entry was the opportunistic one on yesterday’s U&R down at the lows.

 

 

Opportunism took a less extreme form with Franco-Nevada (FNV), which in my view is one of the stronger metals-related names. The pullback last week to the $100 Century Mark offered an opportunistic entry, and then yesterday’s pullback to the 20-dema offered a second. FNV then posted an all-time closing high today as it pushed further above the $100 Century Mark on very strong volume.

At this stage, the stock is extended, and I do not advise chasing it at this point. The time to buy came and went with the opportunistic pullbacks, which is what I preach one must wait for in this market, This is especially when it comes to precious metals and precious metals stocks.

 

 

As gold and silver and their associated stocks stabilize here, Lockheed-Martin (LMT) is posting all-time closing highs. As I wrote over the weekend, LMT’s move last week on the heightening U.S.-Iran tensions has held up well as both a buyable gap-up, base breakout, and Century Mark Rule buy set-up at the $400 price level.

LMT’s action seems to argue for the idea that the situation in the Middle East is not entirely benign. At this point I would only view pullbacks to the 20-dema as the best, lower-risk entry possibilities given how extended the stock is.

 

 

As the market, led by the NASDAQ, continues to move higher, so do the biggest of the big-stock names in the index. But while the move in something like Apple (AAPL), not shown, is nice, it pales in comparison to the upside velocity we’ve witnessed in Tesla (TSLA) over the past six weeks.

The bullish scenario for TSLA has played out this week when initial resistance at the $500 Century Mark held for three days. But that resistance melted away on Monday as the stock blasted through the $500 level, triggering yet another Century Mark long entry signal at that point.

Short interest in TSLA showed a slight decline in the last report dated December 31st, but I wonder whether the stock’s move has simply rolled up the shorts. In other words, as one group of cocksure shorts runs for cover, a new one sees the rally as an opportunity to short an “obviously over-valued stock.”

We’ll know for sure when the latest short-interest numbers are released in the next few days. If there is still a substantial short-interest in the stock, then look out for the $600 level. In the meantime, those long the stock can now use the $500 price level as a trailing stop given how climactic this move has become.

 

 

Netflix (NFLX) is moving onto my Earnings Watch List for next week, since it is expected to report earnings next Tuesday, January 21st. This will be a big one since the stock has a strong tendency to trade in very volatile fashion after earnings. This, then, can bring into play potentially actionable, high-velocity, high time-value price moves.

 

 

Near the end of the month we will see other big-stock NASDAQ names report earnings, such as Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), and Microsoft (MSFT). For that reason, I don’t see much of anything to do with these stocks, especially given their currently extended technical conditions.

Semiconductors in general have been consolidating for the past weeks in most cases. Given that many of these are set to report earnings over the next two weeks or so, they are not on my radar for the most part right now. But given that they are an extended group, I am watching closely for possible short-sale set-ups that might emerge from extended chart positions.

Lumentum Holdings (LITE) is a good example. I first discussed the stock in my video reports many weeks ago, and it has steadily trended higher. And, as I blogged this morning, when leading stocks get well extended, I begin to look for signs that might help me capitalize on at least a tactical short-sale on any sharp pullback off the peak.

Here we see LITE first shows signs of weakness at the top when it reversed hard last Thursday on above-average volume and then continued lower on heavier volume last Friday before finding support along the 20-dema. At that point, my short-sale antennae go up, and I’m watching to see how it handles rallies back up into the 10-dma.

Yesterday, LITE bumped up into the 10-dma and reversed back down to its 10-dma as volume picked up vs. the prior day. It then rallied one more time up toward the 10-dma this morning before reversing again and this time breaking the 20-dema on the downside.

It was therefore shortable at the 10-dma and is so far a nice short-sale scalp ahead of its expected February 5th earnings report. In general, LITE helps to illustrate the type of breakdown I look for in an extended leader that may bring it into play as at least a tactical (essentially short-term) short-sale.

 

 

We can watch for similar potential breakdowns in other extended semiconductors. Notice that Micron Technology (MU), which doesn’t report earnings until March, is starting to drop below its 10-dma. This could be the first sign of a potentially shortable pullback, but it still has to be watched to see how it develops from here.

Another factor in assessing whether extended semiconductors might start to roll over and pull back is earnings season. Most of these names will be reporting over the next couple of weeks, and there’s also Intel (INTC), which is expected to report next Thursday.

So, in a sense, the entire group is subject to sympathy moves in response to the post-earnings action of other semis as they report. At best, I don’t consider any of these to be in optimal buy positions based on how extended they are overall. Thus, I find it a matter of keeping a few of these in your back pocket as possible short-sale candidates if the group runs into trouble.

 

 

Qualcomm (QCOM) illustrates the double-top type of set-up that can produce at least a short-sale scalp. While I have no problem buying the stock on signals down in the lower part of the base or along the 50-dma, when it gets to a double-top area and starts stalling, it begins to look shortable on at least a tactical basis.

QCOM is expected to report earnings February 5th, so it may not do much until then. In fact, this pullback right into the 10-dma on light volume could also be viewed as a lower-risk entry using the 10-dma and 20-dema as tight selling guides. If it breaches support, then it may simply morph into a full-blown, later-stage type of short-sale set-up.

 

 

Universal Display (OLED) reversed today to close below its 10-dma. As I wrote over the weekend, I only like this on pullbacks to the 20-dema. And that would have to be a constructive pullback, otherwise a clean breach of the 20-dema could bring the 50-dma into play and also provide a tactical short-sale entry.

As with any long idea, I am always open to the stock morphing into a short-sale target as it gets more extended to the upside. The upside extension always makes a stock more vulnerable to a sharp pullback, especially in this market, and I want to maintain a 360-degree approach with any stock in this regard.

As well, some of the best short-sale set-ups in this market that produce the highest velocity downside price moves tend to come from stocks that are near their highs. It is the nature of this market, not unlike the fact that the best, highest-velocity upside price moves in stocks tend to come from the lows of their patterns.

 

 

Disney (DIS) posted a big outside reversal to the upside yesterday that was also a big-volume pocket pivot at the 50-dma. This would serve as a long entry signal using the 50-dma or yesterday’s intraday low as a selling guide. Unfortunately, acting on that yesterday would have stopped one out of the trade today when the stock dropped back below the 50-dma.

Now this looks like a short here using the 50-dma as a tight covering guide. Keep in mind that DIS is expected to report earnings on February 4th. So you’re looking for a sharp move to develop ahead of earnings for at least a profitable short-sale scalp from here based on the current technical action.

 

 

Money has continued to drive into cloud-related names. Although the stocks come from a wide variety of specific business lines within the cloud, they almost all moved in synchrony over the past couple of weeks. The best moves, of course, have come from the stocks moving up off the lows of their chart patterns.

This is what the group looks like now, three days after I last posted the cloud-related group chart below. Notice that these have become quite extended on the upside, and this week has seen several of these stall and churn, even reverse, off their current highs. Using my 620-chart, I was able to successfully scalp Avalara (AVLR) and Alteryx (AYX) on the short side.

Now my short-selling antennae are up on all of these, looking for possible downside inflections and probing for short-sale entries using my five-minute 620-chart as a timing tool. Thus, I am looking to stalk these nine names on the short side in the coming days depending on how and whether they set up appropriately.

 

 

Meanwhile, DocuSign (DOCU) has been getting buffeted about as it breached its 20-dema yesterday before finding support at the 50-dma and is acting more like a late-stage type of short-sale target. The bounce at the 50-dma yesterday carried the stock up into its 10-dma where it reversed to close near its intraday lows.

In my view, DOCU is showing the first signs of a leading stock failing at near-term resistance. The breach of the 20-dema was shortable on Monday, with the idea of scalping the move down to the 50-dma. Today’s rally back up to the 10-dma then became shortable at the 10-dma, and DOCU headed lower from there.

The company isn’t expected to report earnings until March, so that is not a factor. Thus, I am now looking at this as a possible late-stage failure type of short-sale set-up, using any rallies up into the 10-dma or 20-dema as short-sale entries. DOCU very nicely illustrates the 360-degree nature of leading stocks as they can suddenly start to wobble and then break to the downside, producing actionable short-sale targets in the process.

 

 

Other clouds that had been basing and which I discussed as being buyable within those bases have continued to move higher. RingCentral (RNG) and Coupa Software (COUP), both not shown, remain extended. All one can do is watch for a pullback to their rising 10-dmas as potential lower-risk entries in either.

Spotify (SPOT) is another breakout that has run into trouble and helps to illustrate the 360-degree nature of breakouts. They can just as quickly morph into short-sale targets when the breakout fails and the stock busts its 10-dma and 20-dema as SPOT has done this week.

 

 

If you compare the daily chart of QCOM to that of Nutanix (NTNX), you will notice certain similarities, like the shakeout and bounce off the 50-dma two weeks ago and the stalling and reversing up here near the prior late-November highs. I was previously looking at this as a long as it came up through the 10-dma and 20-dema, but it is starting to feel more like a double-toppy kind of short.

At the very least, a pullback to the 10-dma is warranted, so I certainly wouldn’t be looking to buy it until that occurred. That said, it could be shortable here looking for a move down to the 10-dma, at which point one can assess whether it becomes buyable there, or whether the probability of a 10-dma breach is higher.

 

 

DataDog (DDOG) has been in the spin-cycle this week, reversing on a big breakout attempt that fell short on Monday and then breaking down to its 20-dema yesterday. But this should not be a problem for buyers who come in on weakness and do not chase strength. In addition, one could have easily recognized the double-toppy characteristics of this formation as it failed near the prior late-November high.

Selling into the strength on Monday would have put one in position to buy the ensuing pullback to the 20-dema yesterday on lighter volume, where a lower-risk entry was found. But DDOG didn’t sustain any upside today as it closed back in the lower part of its price range.

This may need to settle down more here, and for my money I would take the opportunistic route and look for a deeper pullback to the 50-dma as a lower-risk entry opportunity from here.

 

 

The double-toppy thing also comes into play with CloudFlare (NET). On the positive side, the stock has followed through on Friday’s moving-average undercut & rally (MAU&R) long entry which I discussed in my weekend report. It is now back at its prior late-November highs where it stalled and reversed today in double-top fashion.

Personally, I would be inclined to sell into this strength and then buy back on a pullback closer to the rapidly rising 10-dma or 20-dema. NET is expected to report earnings on February 13th.

 

 

A big J.P. Morgan (JPM) health care conference has had stocks in the bio-tech sector moving every which way over the past few days. Inmode (INMD) was not one of the stocks presenting at the conference, but it had a sharp downside break through its 50-dma yesterday and then stalled at the line today.

I wrote over the weekend that one could try and short the stock at the 50-dma IF one could borrow it, and so far, a strategy of hitting it on the short side around the 50-dma has worked on a scalping basis only. In this position, however, INMD is shortable here using the 50-dma as a tight covering guide as we look for perhaps a deeper move to the downside.

 

 

Peloton (PTON) triggered a moving-average undercut & rally (MAU&R) long entry at the 50-dma yesterday and moved higher today. The move today constituted a strong-volume pocket pivot off the 10-dma, 20-dema, and 50-dma on strong volume. It looks like shorts are still in the stock, and this could push it back toward its prior highs above $35.

Watch for pullbacks to the three moving averages as potentially lower-risk entries from here. The latest short-interest numbers for PTON should be available within the next 4-5 days, so it will be interesting to see where things look with respect to the monstrous short-interest as a percentage of the stock’s float.

 

 

Zumiez (ZUMZ) is in its own spin-cycle over the past three days as it broke below the 20-dema on Monday, gapped back above the line on yesterday in a pocket pivot move, and then broke back below the 20-dema again today. Today’s move may have come in sympathy to Target (TGT), which blew up after earnings today, but that’s not necessarily clear to me.

Nevertheless, ZUMZ shook out below the 20-dema and then moved back above the line by the close. That means one can treat this as a MAU&R long entry at the 20-dema while using it as a tight selling guide. Overall, the stock just keeps basing as it really goes nowhere following a big-volume breakout back in early December.

 

 

Roku (ROKU) has been shortable first at its 50-dma and then at its 20-dema last week before finally undercutting the prior 127.22 low of December 31st on Monday and rallying. That U&R led to a move back up to the 20-dema yesterday, where the stock was again shortable.

The stock seems to have some buoyancy here along the lows, and if I were intent on treating the stock as a short-sale target into this rally, I might look to take the more opportunistic route. That means looking for a move closer to the 50-dma.

That said, one could also test a move into the 20-dema as a short-sale entry but maintain a tight stop in order to “dance” with ROKU if it decides to keep going and move closer to the 50-dma. Buyers didn’t seem all that excited about taking shares, so lower lows are not out of the question. ROKU is not expected to report earnings until February 20th.

 

 

I’ll finish up by throwing another double-top idea at you in Snap (SNAP). The stock has been rising off the lows of its base for the past several weeks and is now sitting just above the prior late-September highs at around $18. The stock stalled at those highs badly last week on heavy volume and is now back above those highs on lighter volume.

This brings SNAP into a position where my short-selling antennae go up and I start watching this on my five-minute 620-chart for possible intraday reversal. That would be where I would try and short the stock on an intraday basis.

My work on the short side since the last book I wrote on the topic, Short-Selling with the O’Neil Disciples (John Wiley & Sons, 2015), was published has resulted in some significant changes to my approach. The double-top formation has become a more useful set-up to watch for than the traditional breakdown patterns like the head and shoulders.

This is because the market has a much more distinct rotational nature, so that stocks become most vulnerable to sell-offs at their highs, and most likely to stage sharp rallies off their lows. This changes the equation for short-sellers, who must take a more opportunistic approach, and this is where the double-top set-up comes into play. Play it as it lies.

 

 

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

As things get extended, I want to make newer members aware of the strategy that I employ when probing for possible downside inflections in the market. I do this using leveraged inverse index ETFs like the ProShares UltraPro Short QQQ ETF (SQQQ) as well as the ProShares Ultra-VIX Short-Term Futures (UVXY).

The UVXY tends to be more squirrely and volatile intraday, whereas the action of the SQQQ and other inverse market index ETFs tends to be somewhat cleaner, but not always. In any case, I find it handy to utilize this strategy as the indexes and leading stocks get extended. It works not only as a reasonable hedge against any sharp market pullbacks, but also as an outright profit vehicle if the market corrects more deeply.

For further study on the 620-chart, go to the Gilmo Glossary in the Education section of the website for the appropriate references which you can then look up and study for a better understanding of this tool. There is also a tutorial video on the 620-chart that can be found in the video archives section of the website.

To repeat what I said over the weekend, at this stage of the market rally I don’t think one has to start piling into stocks. In fact, I am starting to see more fruitful short-sale set-ups emerge over the past few days, so that may be telling us something.

Therefore, stay opportunistic, and if you are a nimble 360-degree trader, stay opportunistic on both sides of the market as we progress through the rest of earnings season. Stay tuned.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2020 Gil Morales & Company, LLC. All rights reserved.